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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2010

Rental Housing Picks Up Steam

Several factors are aiding the multifamily market’s growth

The cost and availability of financing is affecting millions of Americans’ ability to buy or sell homes or to rent apartments in desirable markets with strong employment opportunities. But this market disruption also represents attractive opportunities for savvy commercial mortgage brokers. In fact, brokers who keep an eye on emerging market trends, such as the reurbanization of cities and suburbs, likely will find that multifamily financing can be a key component in their success.

There are many factors involved in multifamily financing in today’s tumultuous market, as well as in the growth areas that are spurring reurbanization. Brokers who are aware of these factors likely can carve out lucrative new roles for themselves.

Further, as the homeownership rate declines and demand for rental housing increases, focusing on multifamily lending could help you more effectively align your business with the housing market that emerges during and after the likely reform of Fannie Mae and Freddie Mac.

Where the GSEs stand

Although government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been in federal conservatorship since summer 2008, their market influence is currently unparalleled.

In addition to their prevalent role in residential home financing, the GSEs are increasingly significant in financing today’s multifamily housing industry. The GSEs’ share of the multifamily market was 33 percent in 2006, but they now provide 85 percent of multifamily mortgage capital, according to the CRE Finance Council.

Further, multifamily has been the most consistently successful sector of the U.S. housing-finance system, according to the CRE Finance Council. More than 99 percent of the multifamily mortgages in the GSEs’ portfolios have continued to perform through the economic downturn.

As of this past May, current delinquency rates for multifamily mortgages at Fannie Mae and Freddie Mac were 0.78 percent and 0.32 percent, respectively, according to the CRE Finance Council. In contrast, the delinquency rate for Fannie Mae’s single-family mortgages this past December was 5.38 percent, up from 2.42 percent in December ’08.

Low supply, high demand

Another boon to the multifamily industry is that it did not overbuild in the recent housing boom years. Construction has contracted during the downturn to the lowest level in 40 years, however.

The National Association of Home Builders estimates that the historically low level of multifamily starts — which is less than a third of the 300,000-unit annual average in the past decade — will result in shortages of new rental apartments by the end of 2012. In the short term, the lack of supply likely will increase rents significantly as the economy recovers.

The demographics of the next decade indicate that the market for urban living will continue to grow as the supply of new apartments tightens. Three major demographic groups are expected to drive increased demand for multifamily housing: 78 million baby boomers; the 83 million members of Generation Y (aka echo boomers); and immigrants and their children who are creating new households in the U.S.

The single-family effect

By the end of this year, about 40 percent of all homes with mortgages are expected to be under water — i.e., the loan balance will be greater than the home’s value — according to Deutsche Bank Securities. Many homeowners who no longer have the capacity or the will to support debt service on underwater mortgages are likely candidates for rental housing.

Cash-strapped consumers may choose to rent temporarily as a way to save for their next downpayment and deleverage to improve their creditworthiness.

Renters who previously owned single-family homes may find that they enjoy the apartment lifestyle more than expected. Moreover, some renters may delay the purchase of a home longer than anticipated because of lingering concerns about employment stability and volatility in home values.

A broad look at home-price levels in the past year still does not indicate that the housing market is in any form of sustained recovery, according to this past May’s S&P/Case-Shiller Home Price Index. The report said that since reaching its recent trough in April ’09, the housing market has really only  stabilized at this lower level.

Rental housing likely is an attractive alternative for potential homebuyers waiting on the sidelines for signs of sustained recovery in employment and home prices.

Seize the opportunity

As in the past few years, regional winners and losers will continue to emerge as the real estate markets recover. For example, the Urban Land Institute (ULI) Foundation reports that the worst declines in housing values and the highest rates of foreclosure occurred in five states: California, Nevada, Arizona, Michigan and Florida. In the same period, however, many markets in other states have experienced only modest declines in home values, and some markets are seeing increases.

The strongest markets likely are in places that provide a vibrant urban lifestyle. The ULI Foundation has predicted that the coming decades will be the time of reurbanization as 24/7 central cities grow and suburbs are redeveloped with new or revitalized “live-work-play” environments in suburban  town centers.

This is the time for brokers to identify institutional investors who have grown rapidly and continued to thrive through the downturn. As the market evolves, you have an opportunity to build broader, long-lasting relationships with investors such as non-listed public real estate investment trusts that have continued to raise significant equity and build portfolios in the current market.

As economic, demographic and political changes reshape the real estate and financial markets, mortgage brokers could grow their business by helping lenders and investors understand current trends and identify attractive opportunities to invest accordingly. 


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